Boeing weighs options on tanker contract bid

The company could decide to pull out of competition

By JAMES WALLACE, P-I AEROSPACE REPORTER

Published 10:00 pm, Monday, August 11, 2008

The Boeing Co. is still weighing its options about how to proceed with the Pentagon's new guidelines for a lucrative contract to supply 179 air-refueling tankers to the Air Force, including bowing out of the controversial competition.

But Boeing will wait to see what the Pentagon's final requirements are before making a decision, according to people familiar with the company's thinking.

They disagreed with a report Monday in the industry magazine Aviation Week that quoted unidentified sources as saying Boeing was "strongly considering" not submitting a bid for the $35 billion tanker deal.

"That's too strong," a source told the Seattle P-I, referring to the published report, which drove Boeing's stock down $1.24 a share, or nearly 2 percent. "It's being considered, but it is only an option, and nothing has been decided."

Boeing is likely to know more about its tanker strategy after a meeting Tuesday with Pentagon officials, the source said.

Both Boeing and Northrop Grumman Corp. submitted comments to the Pentagon over the weekend about the draft request for proposals that was issued by the Pentagon last week. Boeing is concerned because the Pentagon has said it will give extra credit to the tanker that can offload more fuel, a development that favors the bigger Airbus A330-200, which Northrop would modify into a tanker.

Boeing's proposed tanker, based on its 767-200, is considerably smaller than the Airbus jet.

Pentagon officials will meet separately with Boeing and Northrop executives Tuesday at Wright-Patterson Air Force Base in Dayton, Ohio, to go over in detail its draft tanker requirements. The Pentagon has said it hopes to be ready to issue a final request for proposals by the end of this week and pick the winner by the end of the year.

Loren Thompson, a noted defense expert with the Lexington Institute, a think tank in Arlington, Va., said it would be a mistake for Boeing to withdraw from the competition.

"They would lose the moral high ground they got with the GAO ruling, and it would likely hand the competition to Northrop," he said.

Earlier this year, Boeing lost the heated and closely watched tanker competition to Northrop Grumman and its partner, the European Aeronautic Defense and Space Co., the parent of Airbus. Boeing was heavily favored, but the Air Force said the Northrop and EADS tanker better met its needs than Boeing's smaller tanker.

Boeing appealed, arguing that the Air Force had made serious mistakes.

The Government Accountability Office, the investigative arm of Congress, sustained Boeing's appeal, saying that Boeing would have had a "substantial chance" of winning if the service had not made significant errors in reaching its decision.

Defense Secretary Robert Gates subsequently announced that a limited competition would be held to reconsider eight areas in which the GAO found serious flaws. Gates also stripped the Air Force of the final say on the new contract. Replacing the service will be a Pentagon review team led by John Young, the undersecretary for acquisitions.

If Boeing chooses not to bid for the disputed tanker contract, it would leave the Pentagon little choice but to award a sole-source contract to Northrop, or to change its tanker requirements or the timetable for picking the winner. If the Pentagon awarded the lucrative deal to Northrop without a competition, it could face a backlash in Congress.

Boeing's other options are either to protest the Pentagon's final tanker proposal, once it is issued, on grounds that it is not fair, or go ahead and bid and then decide whether to protest the contract award if Northrop wins.

Thompson said it would be better for Boeing to file another appeal of either the revised proposal or the final decision if the Pentagon picks Northrop.

"That's their best path forward," he said.

By refusing to bid, Boeing would be hoping to force the Pentagon to change the requirements and level the playing field between the 767 and A330, or delay the competition until Boeing has more time to make a competitive bid with a bigger plane, either the 767-400 or the 777, according to sources.

Northrop has effectively used this no-bid threat before.

Last year, Northrop said it would not bid on the tankers if the requirements favored the smaller 767. At the time, Northrop, with the help of Sen. John McCain, already had gotten the Air Force to drop language in a draft request for proposals that would have given consideration to a dispute between the U.S. and the European Union over Airbus subsidies. Critics argued that linking the subsidy issue to the tanker competition would favor Boeing.

After Northrop threatened not to bid on the tankers, the Air Force made changes in its final request for proposals that Boeing and its supporters in Congress have argued "kept Northrop in the game."

"It's impossible to predict the outcome," Sen. Patty Murray, D-Wash., a vocal Boeing supporter, said Monday when asked what the result would be in Congress if Boeing withdrew from the competition.

"I can tell you it would be very disconcerting," she added. "Congress insisted on having a competition, and if the (request for proposals) from the Pentagon has changed so dramatically that a competitor dropped out, it would not be viewed very well in Congress."

Asked if this could be an effective Boeing strategy, Murray said, "I don't know. That's the 64 million-dollar question. ... There are a lot of paths forward."

An appeal of the final request for proposals would effectively delay the competition until after a new administration takes over in January.

The contract for 179 tankers is the first of three deals potentially worth up to $100 billion to replace the Air Force's entire tanker fleet over 30 years.

Boeing has long argued that the Airbus A330 was too big and did not meet the original requirements spelled out by the Air Force.

In its draft proposal issued last week, the Pentagon left little doubt about what it wants.

"We now have highlighted and made very clear to (Boeing and Northrop) what the relative importance of each mission capability area is and ... the relative importance of our requirements," Shay Assad, director of defense procurement and acquisitions policy, said at a Pentagon briefing.

He said the team picking the winning tanker will give extra credit for the plane that can carry more fuel.

The Pentagon is expected to elaborate on that view, and explain how much extra credit will be given to fuel offload capability, during Tuesday's meetings.

Boeing's aircraft options, however, are pretty much limited to the 767-200.

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It could offer the bigger 767- 400, which is about the same size as the A330-200. But changing planes now would require more than the 45 days the Pentagon is allowing to submit revised bids.

Boeing could even offer its 777, which is considerably bigger than the A330-200. But that plane might be too big and expensive. And Boeing's 777 production line in Everett is at capacity to meet commercial demand, and Boeing would be hard-pressed to find room on the production line any time soon.